EuroBusiness Media (EBM): Michelin, the world's largest tire maker, just reported first half earnings for 2005. Michel Rollier, welcome. You are a Managing Partner and the CFO of Michelin. What are your comments on your first half earnings report?
Michel Rollier (MR): I can say that most Michelin key indicators are improving. Our operating margin is up, at 9.2%, compared to 9.1% last year, and it is well above market expectations. The net profit is up by 5.5%, and our price mix effect is very significantly positive; this allowed us to compensate for lower volumes, which were slightly down, by 4%. This was obtained in a very challenging environment; on one hand we had very contrasting markets, and on the other a continuing escalation of raw material prices. Regarding cash flow, this is clearly related to normal seasonal fluctuations, including inventory build-up. Some expenses were incurred in the first half of the year, rather than the second half - which explains some of the differences between 2004 [figures] and 2005. But I would also like to highlight the remarkable performance of our third reporting segment - specialty activities - where the operating margin has significantly increased, from 2.6% to 9.2%. It really is an achievement.
EBM: What are the main trends you've observed, region by region?
MR: The markets contrasted greatly according to region, and between replacement and original equipment markets. In Europe, replacement markets were down, sharply down, and I should say historically down, as far as the truck replacement market is concerned. The passenger car market was down too, but to a lesser extent. North American replacement markets were slightly up; no specific comment to be made there. And for original equipment, it's a bit of a mixed bag for passenger cars and light trucks, but trucks have been doing very well, in Europe, as in North America.
EBM: When can we hope to regain visibility on the tire market? When do you see a likely turnaround?
MR: I would not say that we lacked visibility. More or less, markets in the first half, have been in line with the guidance that we delivered at the beginning of this year. With one remarkable exception, that of truck tires, which is down 8%, as I said. But besides that, the other markets were in line with our expectations. In the mid-term, they will continue to grow along their normal trend line, which is 2% to 3% per annum for passenger cars and light trucks, with more marked fluctuations for truck tires (between +4% and -4%); you know that truck replacement is more related to the general activity of the economy.
EBM: Financial analysts are concerned about the outlook for the truck tire replacement market, which appears to be more sluggish than expected. What are your comments on this issue?
MR: We have never experienced such a drop in the past, we have to be clear about that. It has occurred in all countries, in Western Europe as well as in Eastern Europe. In the short term, we do not see any significant turnaround. This is to say that, taking it on an annual basis, we are now expecting a 3% decline for 2005 vs. 2004. It's less than the 8% we've seen for the first part of the year, but given a more favourable basis of comparison, we feel that -3% is a reasonable expectation.
EBM: What is your outlook for commodity prices going forward? How will you cope with the current high price of raw materials?
MR: For some time now, we have been saying that we are entering an era of expensive raw materials, and as of today, we do not see any reason to change that for the foreseeable future. Natural rubber, synthetic rubber, styrene, butadiene, steel will remain expensive, and prices will go up. We do not see any relief. This cost us between 250 and 260 million euros in the first part of the year, and our current projection is 400 to 450 million euros for the full year -- which is between 14% and 15% increase, well in line with what we said at the beginning of this year. And we will live with that. In other words, we will have to continue to improve our efficiency, our costs and pass on to the market the increased costs of raw materials.
EBM: In the current difficult market environment, how do you rate your ability to pass on price increases, as you always managed to do in the past?
MR: Over the last six months, we have been able to introduce price increases across the board, in the replacement market, as well as in original equipment. There are only a few exceptions in the European replacement market, given the aggressive competitive environment. If you want a successful pricing policy, you need first a will, and we have it. You need strong brands, and you know the strength of the Michelin brand, and you also need to manage that in a manner that will make it acceptable to the end customer. This requires a very fine tuning, and we have demonstrated, over the last year, our capability to do this. On top of that, do not forget that the tire industry as a whole is facing raw material inflation.
EBM: You are increasing your capital expenditure by nearly 20% in 2005. What is the money mainly being spent on, and more generally, what is your capex policy going forward? Where do you plan to make new investments?
MR: Our plan is to invest 1.3 billion euros in 2005 and a very similar figure in 2006 and 2007. At the end of June, with slightly more than 500 million euros spent, we are well in line with our target. Bear in mind that markets are growing 2% to 3% per year overall, but emerging markets are growing more than 10% per year. Even though Michelin is a global player, we have a smaller market share in these new countries. In other words, we have to invest heavily in order to follow the growth of these markets, but also to gain market share in this new segment of the market. At the same time, we have to keep our existing plants in operation, improve costs, improve productivity, and make the necessary adaptations to follow the trends of the market. This is to say we will invest heavily in the emerging world, building new, greenfield plants. The tire industry is very capital-intensive, which explains the 1.3 billion invested in greenfields in the eastern world and adaptation in the Western World.
EBM: You are actively developing your business in India and China. Could you give us more detail about your strategy in these two countries?
MR: Asia has become a major market for the tire industry. It represents 30% of the world tire market, compared to 24% to 25% three years ago. And if we consider the truck tire market, it's already 40% of the world tire market. In China, we have established a strong basis for our operations: in the trucks market, we have a small market share because radialization rate is still low, but we have a very strong equity. For passenger cars and light trucks, we already have a market share between 15% and 20%, and our sales under Michelin brand have grown at a very high pace over the last two years. India will take more time, the radialization process being much lower than that in China. We intend to become a strong player in this country, but it will take more time.
EBM: And finally, what is your outlook and guidance for the rest of the year?
MR: Markets will remain very challenging, with large discrepancies between regions and segments. The cost of raw materials will continue to escalate and we anticipate a 7% to 8% increase in the second half of the year versus the first half, which will lead to a 14% to 15% raw material price increase year on year. Besides that, we will continue to improve our price mix, and keep a tough control on our costs. As a result, we feel we will be able to improve our full-year operating margin versus last year.
EBM: Michel Rollier, Managing Partner and Chief Financial Officer of Michelin, Thank you.
MR: Thank you.
